What Is Refinancing Student Loans? Explained In Simple Terms

Student loan refinancing involves transferring your student loan debt from your existing lender (the US government) to a loan company.

In essence, your new creditor, a private lender, pays off your debt, and you enter into a new loan agreement with them to pay it back.

For many medical professionals, student loan refinancing can be an appealing prospect.

Having spent ages at medical school, and racked up staggering amounts of student loan debt doing so, managing repayments during residency can be challenging.

Refinancing these current student loans helps because private lenders offer loan terms with lower interest rates and monthly payments.

This article explains the criteria you’ll need to meet to refinance your student loans, the pros and cons, and more.

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Key Takeaways

• Eligibility criteria include a decent credit score and history, a low debt-to-income ratio, education qualifications, a steady income, and an appropriate loan amount.
• The benefits of refinancing include lower interest and monthly payments, consolidated debt, and adjustable payment plans.
• Cons of refinancing include forfeiting the opportunity for the government to forgive it, and zero guarantees for better terms.

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Eligibility Criteria for Student Loan Refinancing

You can refinance both federal student loans and private ones, provided you meet the following criteria:

Decent Credit Score

When weighing the prospects of refinancing your student loans, loan servicers will consider your credit score and credit history.

Thus, you’ll need to have good credit, if only to reassure the private lender that you won’t be a risky investment.

Desirable credit scores differ from one lender to the next. However, a credit score no lower than 650 and a history of prompt repayments should make your loan application more palatable.

Low Debt-to-Income Ratio

When applying for doctors home loans, you can get away with a debt-to-income (DTI) ratio as high as 50%. The opposite is true in the student loan refinance industry.

Your DTI must be lower than the above percentage to convince lenders of private student loans of your ability to keep up with the repayments.

Education Status

Most lenders prefer to work with medical school graduates, though a few will take you on even if you don’t have a medical degree.

Income

You’ll need to provide evidence that you’re holding down a steady job and can afford to meet your student loan payments.

While many lenders require that you earn a minimum amount annually, the said amount varies from one institution to the next.

Loan Amount

Private lenders set minimum amounts for a refinanced loan. Student loan borrowers looking to refinance less than $5,000 in debt will find it challenging to secure a lender.

The above factors vary depending on the lender. Consider shopping around to learn which private loan programs you qualify for.

Pros and Cons of Refinancing Federal Student Loans

Refinancing your student loan comes with benefits and drawbacks that you should both know about:

Pros

Medical professionals who refinance student loans can expect the following benefits:

Lower Interest Loans

When you refinance federal student loans, you can qualify for a lower interest rate or switch from a variable interest rate to a fixed rate.

Not only will it let you repay the principal on the loan quicker, but it’ll also let you save money in the long run.

Lower Monthly Payment

Qualifying for a lower interest rate means lower monthly payments on your existing loans. If you’re financially savvy, you can redirect the extra income into a financial vehicle or real estate investing.

Consolidated Debt

Refinancing allows for streamlined student loan consolidation. Instead of owing many student loan borrowers, you deal with only one lender.

Altered Payment Plan

At its core, student loan refinancing gives you a reset on the terms of your original loan. This characteristic means you can choose a new payment term.

For example, you can either extend or retract your term between 5, 10, or 20 years, depending on whatever works for you.

The majority of the above benefits can translate to reduced financial hardship and lower borrowing costs.

Cons

Refinancing these federal loans involves the following drawbacks:

Ineligibility for Student Loan Forgiveness

By refinancing your student loan and transferring ownership of the debt from the government to a private lender, you give up eligibility to qualify for student loan forgiveness programs.

This drawback is the main factor to consider, as your new creditor won’t forgive your loan.

No Guarantees When You Have Bad Credit

While many refinancing companies are open to working with borrowers with bad credit, it can be a double-edged sword.

If you don’t have a good credit score, you’ll be in a weaker negotiating position, meaning you’ll have zero guarantees of flexible payment terms, lower interest rates, or a fixed-rate loan.

Also, since the Federal Reserve’s last interest rate hike, it’s become more challenging to get lower interest rates.

Longer Repayment Terms

If you refinance your student loan debt while halfway through paying it off, the reset may mean a longer loan term in exchange for a lower payment each month.

Thus, if you’re holding onto the hope that your debt will be forgiven someday, understand that refinancing will forever preclude you from such an opportunity.

Alternatives to Student Loan Refinancing

Alternatives to student loan refinancing include:

Consolidation

This option lets you consolidate or bundle up your student loans into a single one while keeping your federal loans with federal loan service providers.

It’s an excellent option if you hope to qualify for student loan forgiveness in the future.

Income-Driven Repayment Plans

Another alternative to refinancing involves entering into an income-driven repayment plan, the most popular option being the SAVE plan.

Cosigned Refinancing

Refinancing with a cosigner can improve your chances of approval if you’ve applied on your own with little success.

The above options are worth a look if the cons of refinancing have put you off from the idea, but you’re still burdened by student loans..

Frequently Asked Questions

How Many Times Can You Refinance a Student Loan?

There’s no limit to the number of times you can refinance a loan. At its core, refinancing boils down to borrowing money to service an existing loan and pay off an existing lender.

Thus, as long as the new lender pays the debt you owe to the previous one, you could technically transfer your debt in this way indefinitely.

Does Refinancing Hurt Your Credit?

Yes, it can hurt your credit, since the lender will perform a hard inquiry on your credit report.

If you shop around for multiple lenders over several months while mulling over your refinancing options, each hard inquiry will affect your score.

To mitigate the problem, shortlist lenders to only a handful of options.

Can You Refinance With the Same Lender?

Yes, subject to your meeting the lender’s eligibility requirements. Many private lenders let you refinance your student loan multiple times.

For example, it’s possible to refinance a loan to have a fixed interest rate (from a variable one).

Your lender will have the final say on whether your refinancing application gets the go-ahead.

Final Thoughts

Refinancing student loan debt can be an excellent way to keep your repayment costs down in the future.

However, you’ll have to weigh the benefits against the risk of missing out on student loan forgiveness altogether.

Seeking a professional’s opinion will provide clarity on the best course of action someone in your position can take.

If you’d like guidance on whether refinancing is right for you, consider speaking to one of our advisors.

Contact us today to take the first step in your refinancing journey.